TY - JOUR
AU - McGrattan,Ellen R.
AU - Prescott,Edward C.
TI - On Financing Retirement with an Aging Population
JF - National Bureau of Economic Research Working Paper Series
VL - No. 18760
PY - 2013
Y2 - February 2013
DO - 10.3386/w18760
UR - http://www.nber.org/papers/w18760
L1 - http://www.nber.org/papers/w18760.pdf
N1 - Author contact info:
Ellen McGrattan
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 4th St S
Minneapolis, MN 55455
Tel: 612-625-6714
E-Mail: erm@umn.edu
Edward C. Prescott
Arizona State University
Economics Department
P. O. Box 879801
Tempe, AZ 85287-9801
E-Mail: edward.prescott@asu.edu
AB - A problem facing the United States is financing retirement consumption as its population ages. Proposals for switching to a saving-for-retirement system that do not rely on high payroll taxes have been challenged on the grounds that welfare for some cohorts will fall. We show how to devise a transition path from the current U.S. system to a saving-for-retirement system that increases the welfare of all current and future cohorts, with estimates of future gains that are twice as large as those found with typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Furthermore, the gains are amplified if we lower capital taxes in addition to payroll taxes because the value of business equity increases relative to the capital stock. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income-weighted average marginal tax rates used in our analysis.
ER -